Dividend bonanza rolls on as RBA urges asset building

Mark Mulligan

Equity investors had billions of reasons to be happy this week as this reporting season's dividend and share buyback deluge continued unabated.

But the corporate benevolence reignited debate about whether shareholder lollies are the best use of company funds - or whether corporate Australia needs to invest more to pick up the slack left as the mining investment boom tails out.

Why give away money when you can invest it or spend it on new capital equipment, innovation, or skilled workers?

Insurer AMP on Thursday became the latest stockmarket heavyweight to unveil a higher payout, offering investors a 9 per cent increase in the interim dividend, to 12.4¢ a share.

Earlier in the week, retail-to-mining conglomerate Wesfarmers was a big hit with a $1-a-share special payout on top of its $1.05-a-share full-franked dividend and a 10¢ centenary payout. All this added up to $3.3 billion.

By midweek about $15.5 billion in cash had already fallen to shareholders, up from $13.6 billion the same time last year, according to CIMB. Telstra had done its bit with a $1 billion share buyback and increased dividend, while Commonwealth Bank of Australia handed back about $3.5 billion in its second-half dividend, for a total full-year payout of $6.5 billion. This equates to a payout ratio of a whopping 75 per cent.

On Wednesday, Reserve Bank of Australia governor Glenn Stevens toned down celebrations, suggesting that the billions of dollars returned to shareholders as dividends or equity buybacks might be better deployed in fixed assets that drive growth and absorb labour.

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"The thing that is most needed now is something that monetary policy cannot directly cause," Mr Stevens told the House of Representatives Economic Committee in Brisbane.

"We need more of the sort of so-called 'animal spirit', or confidence if you like, that is needed to support not just a repricing of the existing stock of assets, but the investment that adds to that stock of physical assets."

His comments reflected concerns about the limits of monetary policy in stimulating business activity.

UBS Wealth Management's head of investment strategy David Sokulsky calculates that the average dividend ratio of Australian corporations is at 69 per cent of net profits, which is an all-time high except for a short spike in 2009.

On another measure, Goldman Sachs equity strategist Matthew Ross says the ratio at the average industrial company is about 50 per cent of free cash flow, which is earnings before interest and tax, plus depreciation and amortisation and less changes in working capital. This compares with about 30 per cent in the decade before the financial crisis, when the same companies re-invested about 70 per cent of free cash flow into the business.

So why give away money when you can invest it or spend it on new capital equipment, innovation, or skilled workers? The answer, according to most experts, is that the focus since the GFC has been cutting costs to brace for the long slow road to global recovery. At the same time, record low interest rates means fixed-income investment is unattractive to companies and their shareholders.

Instead, chief executives see benefit in keeping shareholders on-side with plump dividends and premium-paying buybacks. This keeps market values high and helps project a picture of corporate health. The share performance this year of Telstra and, more recently of CSL - both generous to investors - are cases in point.

On the other side of the equation, Australia's ageing population means today's equity investor is increasingly likely to be a retiree or semi-retiree relying on dividends for income, much as they might have done before with bond coupons or bank term deposits.

"As more baby boomers retire, because of the need for income, we're seeing a larger proportion of dividends being used as income than we have seen previously," says Sokulsky.

The trend, like the investors themselves, however, is transitory.

"What you'll find is that once yields start rising and people aren't relying primarily on dividends for income then you should start seeing companies holding on to the money," he says.

In any case, many argue, dividend income is being churned back into the economy and so should eventually lead to increased aggregate demand for goods and services, and so more jobs.

In the meantime, Mr Stevens and his counterparts can do little but prod company executives from time to time. With real interest rates close to or below zero in most of the modern world, central banks have no more powder to keep dry.